All posts by Clifford E. Kirsch, Editor

Eversheds Sutherland With more than 25 years of experience, Cliff regularly counsels clients on the design and distribution of investment products including wrap-fee programs and other advisory products, mutual funds, bank collective investment funds and insurance products. He also focuses on issues related to the design and implementation of compliance programs at financial services firms.

“Luke, I am your father.” (Or not.) Collective False Memory and SEC and FINRA Enforcement Issues from November and December 2020

Often, there are quotes, spellings, symbols, events, or experiences that many of us “know” occurred, but which did not actually happen. This phenomenon is known as the “Mandela Effect,” or “collective false memory.” Its name derives from the false recollection of many people that Nelson Mandela died in the 1980s in prison when, in fact, he lived until 2013.   One example of such a false memory is the iconic quote, “Luke, I am your father,” which Darth Vader proclaimed to his son, Luke Skywalker, in the 1980 classic film “Star Wars: Episode V—The Empire Strikes Back.”  However, that line was never uttered. The correct quote is, “No. I am your father.”

To be clear, we don’t think the securities regulators have false collective memories—other than, possibly, believing this line: “It’s easy for you to produce that information to us. You can just push a button.” And we don’t think the securities industry has such false memories either—other than possibly believing that the SEC sanctioned firms for using the word “may.” (Wait. That really did happen. ) Nonetheless, we thought it would be fun to explore this phenomenon and see how it fits with enforcement matters. After all, it’s important to examine ourselves and our surroundings to better understand what happened and why.

Read More Here.

On the right track: Securities & Exchange Commission adopts rules to streamline private offering exemptions

On November 2, 2020, the Securities and Exchange Commission (the SEC) voted to adopt final amendments (the Amendments) 1 to “simplify, harmonize, and improve certain aspects of the exempt offering framework.” 2 The Securities Act of 1933, as amended (the Securities Act), requires that every offer and sale of securities be registered with the SEC, unless an exemption from registration is available. The current exempt offering framework includes ten exemptions or safe harbors from the registration requirements of the Securities Act, each with distinct requirements. The goal of the Amendments is to reduce unnecessary complexity within the exempt offering framework and to allow market participants (including business development companies, or BDCs) to navigate through the exempt offering framework more easily.

To summarize, the Amendments:

  • clarify the ability of issuers to move from one exemption to another;
  • revise certain offering and investment limits to address inconsistencies in current rules;
  • set clear and consistent rules governing offering communications between investors and issuers (e.g., “test-the-waters” and “demo day” activities); and
  • harmonize certain disclosures, eligibility requirements and bad actor disqualification provisions.

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Appeals Court Disregards FINRA Rule in CCO Case

In a recent review of a disciplinary action charging a chief compliance officer (CCO) with committing “should have known” liability, the DC Circuit Court of Appeals, in a per curium opinion, ignored the FINRA rule that the CCO allegedly violated. The decision raises questions about how FINRA will charge firms and compliance officers for “should have known” violations.

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Not Dead Yet: Just Flesh Wounds, Suspensions, and Fines (SEC, CFTC, and FINRA Enforcement Actions in September 2020)

The Holy Grail. Knights who say “Ni.” The list goes on and on. (Wink wink, nudge nudge, say no more.) Monty Python, the comedy group, is known for a lot of things. However, what most people don’t know is that if you watch their movies, TV shows and Broadway musical very carefully, you’ll actually learn a lot about compliance and securities enforcement.

To understand what Monty Python can teach us about the SEC, CFTC and FINRA enforcement actions brought in September 2020,  read more here.

FINRA Panel Stretched Rule 8210 Too Far

A recent 2-1 decision by the Financial Industry Regulatory Authority Office of Hearing Officers stretched Rule 8210 beyond its wording and intent, barring a registered representative in the process.

The case, Department of Enforcement v. Wilfredo Felix, et al., involved several issues, including Felix’s failure to produce his Wage and Income Transcript (IRS transcript), which he could have obtained by submitting an IRS Form.

An IRS transcript is an IRS-created document that shows “most line items” from tax returns, including adjusted gross income. During the investigation, FINRA staff asked Felix to produce his IRS transcripts (a very rare request), which he did not have in his possession, or to sign an IRS Form instructing the IRS to send them to him.

He refused, stating that FINRA’s request went beyond the scope of Rule 8210.

Read More Here.